John Hasnas is a professor of ethics and law at Georgetown University’s McDonough School of Business and is the author of the book, Trapped: When Acting Ethically is Against the Law (Cato 2006), which is an adaptation of Professor Hasnas’ article Ethics and the Problem of White Collar Crime. This previous post discussed one of Professor Hasnas’ articles on the perverse effect that implementation of the Department of Justice’s Thompson Memo has had on companies serving up their employees as sacrificial lambs to avoid an Arthur Andersen-like meltdown.
Following on that article, Professor Hasnas authored this WSJ ($) op-ed over the weekend on the real problem that underlies such policies as those implemented under the Thompson Memo:
DOJ policy is merely a symptom of the underlying disease: the untenable standard of corporate criminal liability embodied in federal law. Attempting to reform DOJ policy without changing the law is a bit like treating a lung-cancer patient’s cough. It won’t hurt, but it won’t help that much either.
When should corporations be subject to criminal punishment? Perhaps never. These entities cannot be imprisoned, only fined; and the fines are paid by the corporations’ shareholders. The defining characteristic of the modern publicly traded corporation is the separation of ownership and control: Shareholders do not control the actions of corporate employees. Thus, imposing criminal punishment on a corporation, rather than on the employees who committed the offense, punishes shareholders who are innocent of wrongdoing.
And what should the standard be?:
A highly restrictive standard would require the prosecution to demonstrate some positive step taken by corporate policy makers to facilitate the employees’ criminal conduct. A less restrictive standard would require only that upper management be willfully blind or perhaps merely negligent with regard to employee misconduct. An even less restrictive standard would presume corporate involvement in employee criminal activity, but allow corporations to raise their good faith efforts to discourage employee wrongdoing as an affirmative defense. But even the least restrictive standard would be sufficient to break DOJ’s stranglehold on corporations.
Read the entire piece. Changing the standard of corporate criminal liability would not interfere in the slightest with the government’s ability to prosecute corporate employees and would preserve jobs and wealth for those who not involved in any corporate criminal activity. Moreover, it would prevent the government from coercing companies into becoming quasi-law enforcement agencies or risk being prosecuted out of business. That would provide at least a modest (and long overdue) balancing of the playing field in corporate criminal matters.
There are two distinct issues at play. One is whether to hold shareholders responsible for the criminal actions of the employees of the company. The second is whether DOJ and other law enforcement agencies ought to be able to coerce companies as you describe.
I have no problem with shareholders paying the price. They pick the board which picks the management which hire the employees. While shareholders don’t ‘control’ employees, shareholders benefit when the employees do good things, so they ought to suffer when employees go bad. Why shouldn’t, for example, Apple sharedholders who have profitted from Steve Jobs’ development of the Ipod suffer financially if it turns out that he was playing games with backdating options?
Steve, it makes no sense to punish Apple’s shareholders for Jobs’ hypothetical criminal act in backdating options because the shareholders — according to the government’s theory of criminal liability in regard to backdating options — are the victims of Jobs’ criminal act. Why should the innocent victims be required to absorb criminal penalties, too?